4 Reasons to Buy a 529 Plan Through an Adviser

Many of the articles you read about 529 plans suggest that you enroll in one "directly" rather than going through an investment broker. The primary reason: 529s purchased through a broker, aka financial adviser, generally are more expensive than their direct-sold counterparts are. And you might not only have to pay a hefty sales charge, but annual costs in adviser-sold 529s are typically higher as well. Apparently, not everyone is listening. The most recent data survey by Financial Research Corp. found that more than 50 percent of all assets in 529 plans at the end of 2009 resided in adviser-sold plans. In fact, the largest adviser-sold 529 plan (Virginia's CollegeAmerica) is three times larger than the largest direct-sold 529 plan (New York's). What's more, three of the five largest 529 savings plans are adviser-sold. Can all these families buying their 529 plans through a financial adviser be wrong? The answer is no. There are many valid reasons parents and grandparents decide to open 529 plans through financial advisers. Here are some of the most important ones. You need help in selecting a 529 plan. With well over 100 Section 529 prepaid-tuition and college-savings plans in existence, you could easily get confused in searching out a plan on your own. Oftentimes, confusion leads to inaction, and you may simply never get around to pulling the switch and opening a 529 account. The job of a financial adviser is to understand your financial goals and make a recommendation to you. If this is what it takes to get you started on building a college fund, you will likely be much better off -- even after expenses -- than just letting your savings sit in a fully taxable bank savings account or money market fund. The broker-dealer firm where your adviser works has special procedures to vet 529 plans before they allow their advisers to sell them. Financial regulators also require that the broker-dealer ensure the plan being recommended by its adviser be "suitable" to you, and must also make you aware that an in-state 529 plan may have special state tax benefits or other advantages over out-of-state plans, even if the firm does not sell the in-state 529 plan. A financial adviser must also disclose all fees and expenses, including the commissions earned by the broker-dealer. Although the adviser cannot recommend a 529 plan that is not approved by the broker-dealer, many advisers will steer their clients to the in-state direct-sold 529 plan when they feel it is in their best interest. Giving up the potential commission is a very small price for them to pay. You currently depend on a financial adviser. You may already be working with a financial adviser for retirement, estate-planning, and general investing purposes. If you are happy with that arrangement, and don't mind paying commissions on investments for those needs, why would you not trust your adviser to handle your college savings? For many individuals, planning for college must be coordinated with retirement and estate planning -- a complex exercise to say the least. The knowledge and resources a financial adviser can offer in helping you to plan your financial future is very valuable. Of course, this assumes that the adviser upon whom you rely has the requisite knowledge and experience. Not all do. You may not have to pay high sales charges. A 529 plan recommended by a financial adviser can come in as many as five different "share classes," each with a different expense structure. "A" shares usually have the highest upfront cost, with a sales charge of as much as 5.75 percent on each investment, but also have the lowest ongoing annual expenses. Don't assume that all adviser-sold 529 plans cost the same. For example, the Illinois Bright Start Advisor College Savings Program charges only 3.5 percent on A shares, which is less than the typical sales charge on mutual funds. "C" shares have no upfront sales charge. However, they incur higher annual expenses that over a few years add up to be greater than the A-share sales load. You might choose C shares if your child is older and has a short investment horizon. Your financial adviser can explain the fee structure of any other available classes and recommend the appropriate class in your particular case. Be sure to ask about the availability of a reduced A-share sales charge if your investment balance reaches certain "breakpoints." In some 529 plans, your eligibility for breakpoint pricing will count any investments you have in the program manager's family of mutual funds held outside the 529 plan, such as in a brokerage account or IRA. Also, consider that many 529 plans will waive the A-share sales load entirely if you are purchasing the plan through a fee-based financial planner rather than a commission-based broker. This makes sense, considering that fee-based planners charge their own fees based on assets under management or on an hourly rate. The iShares 529 Plan offered through Arkansas is sold exclusively through fee-based planners, which means you will not pay a sales charge for that particular plan. You are looking for active investment management. In the race to offer the lowest-cost program, many states are using only passively-managed index funds in their direct-sold 529 plans. Adviser-sold 529 plans tend to use higher-cost actively-managed mutual funds as underlying investments. Some investors, and their advisers, are happy to stick with the low-cost index-fund options featured in many direct-sold 529 plans while others feel they will do better trying to "beat the market" with actively-managed funds. Which type of investor are you? Over the past few years, index funds and the 529 plans that use index funds have performed very well compared to their actively managed competitors. Yet 2009 was a year when active management produced better results for many investors. The 529 performance rankings produced by Savingforcollege.com found that 21 of 34 (62 percent) adviser-sold 529 plans scored above the mid-point performance level for one-year returns as of Dec. 31, 2009 (using A-share returns measured on net asset value), compared to only 14 of 54 (26 percent) direct-sold 529 plans. However, with maximum sales charges reflected in the one-year returns, only five of 33 (15 percent) adviser-sold 529 plans exceeded the mid-point return. Over a longer investment period, the effect of the A-share sales charge on fully loaded performance will lessen. And always remember: Past performance does not guarantee future results. Posted March 19, 2010 Many of the articles you read about 529 plans suggest that you enroll in one "directly" rather than going through an investment broker. The primary reason: 529s purchased through a broker, aka financial adviser, generally are more expensive than their direct-sold counterparts are. And you might not only have to pay a hefty sales charge, but annual costs in adviser-sold 529s are typically higher as well. Apparently, not everyone is listening. The most recent data survey by Financial Research Corp. found that more than 50 percent of all assets in 529 plans at the end of 2009 resided in adviser-sold plans. In fact, the largest adviser-sold 529 plan (Virginia's CollegeAmerica) is three times larger than the largest direct-sold 529 plan (New York's). What's more, three of the five largest 529 savings plans are adviser-sold. Can all these families buying their 529 plans through a financial adviser be wrong? The answer is no. There are many valid reasons parents and grandparents decide to open 529 plans through financial advisers. Here are some of the most important ones. You need help in selecting a 529 plan. With well over 100 Section 529 prepaid-tuition and college-savings plans in existence, you could easily get confused in searching out a plan on your own. Oftentimes, confusion leads to inaction, and you may simply never get around to pulling the switch and opening a 529 account. The job of a financial adviser is to understand your financial goals and make a recommendation to you. If this is what it takes to get you started on building a college fund, you will likely be much better off -- even after expenses -- than just letting your savings sit in a fully taxable bank savings account or money market fund. The broker-dealer firm where your adviser works has special procedures to vet 529 plans before they allow their advisers to sell them. Financial regulators also require that the broker-dealer ensure the plan being recommended by its adviser be "suitable" to you, and must also make you aware that an in-state 529 plan may have special state tax benefits or other advantages over out-of-state plans, even if the firm does not sell the in-state 529 plan. A financial adviser must also disclose all fees and expenses, including the commissions earned by the broker-dealer. Although the adviser cannot recommend a 529 plan that is not approved by the broker-dealer, many advisers will steer their clients to the in-state direct-sold 529 plan when they feel it is in their best interest. Giving up the potential commission is a very small price for them to pay. You currently depend on a financial adviser. You may already be working with a financial adviser for retirement, estate-planning, and general investing purposes. If you are happy with that arrangement, and don't mind paying commissions on investments for those needs, why would you not trust your adviser to handle your college savings? For many individuals, planning for college must be coordinated with retirement and estate planning -- a complex exercise to say the least. The knowledge and resources a financial adviser can offer in helping you to plan your financial future is very valuable. Of course, this assumes that the adviser upon whom you rely has the requisite knowledge and experience. Not all do. You may not have to pay high sales charges. A 529 plan recommended by a financial adviser can come in as many as five different "share classes," each with a different expense structure. "A" shares usually have the highest upfront cost, with a sales charge of as much as 5.75 percent on each investment, but also have the lowest ongoing annual expenses. Don't assume that all adviser-sold 529 plans cost the same. For example, the Illinois Bright Start Advisor College Savings Program charges only 3.5 percent on A shares, which is less than the typical sales charge on mutual funds. "C" shares have no upfront sales charge. However, they incur higher annual expenses that over a few years add up to be greater than the A-share sales load. You might choose C shares if your child is older and has a short investment horizon. Your financial adviser can explain the fee structure of any other available classes and recommend the appropriate class in your particular case. Be sure to ask about the availability of a reduced A-share sales charge if your investment balance reaches certain "breakpoints." In some 529 plans, your eligibility for breakpoint pricing will count any investments you have in the program manager's family of mutual funds held outside the 529 plan, such as in a brokerage account or IRA. Also, consider that many 529 plans will waive the A-share sales load entirely if you are purchasing the plan through a fee-based financial planner rather than a commission-based broker. This makes sense, considering that fee-based planners charge their own fees based on assets under management or on an hourly rate. The iShares 529 Plan offered through Arkansas is sold exclusively through fee-based planners, which means you will not pay a sales charge for that particular plan. You are looking for active investment management. In the race to offer the lowest-cost program, many states are using only passively-managed index funds in their direct-sold 529 plans. Adviser-sold 529 plans tend to use higher-cost actively-managed mutual funds as underlying investments. Some investors, and their advisers, are happy to stick with the low-cost index-fund options featured in many direct-sold 529 plans while others feel they will do better trying to "beat the market" with actively-managed funds. Which type of investor are you? Over the past few years, index funds and the 529 plans that use index funds have performed very well compared to their actively managed competitors. Yet 2009 was a year when active management produced better results for many investors. The 529 performance rankings produced by Savingforcollege.com found that 21 of 34 (62 percent) adviser-sold 529 plans scored above the mid-point performance level for one-year returns as of Dec. 31, 2009 (using A-share returns measured on net asset value), compared to only 14 of 54 (26 percent) direct-sold 529 plans. However, with maximum sales charges reflected in the one-year returns, only five of 33 (15 percent) adviser-sold 529 plans exceeded the mid-point return. Over a longer investment period, the effect of the A-share sales charge on fully loaded performance will lessen. And always remember: Past performance does not guarantee future results. Posted March 19, 2010